The US stock market could suffer a devastating crash with shares losing a
third of their value this week if Hank Paulson’s financial bailout plan fails,
US Treasury officials have warned.

The financial system could face a meltdown of 1929 proportions unless US
politicians succeed in their efforts for a $700bn rescue scheme, experts
added.

The warning came as Republicans and Democrats met in Washington for a rare
weekend debating session to attempt to seal agreement on the contentious plan,
aimed at preventing a long-lasting recession in the US.

Officials close to Paulson are privately painting a far bleaker portrait of
the fragility of the global economy than that advanced by President George W
Bush in his televised address last week.

One Republican said that the message from government officials is that “the
economy is dropping into the john.” He added: “We could see falls of 3,000 or
4,000 points on the Dow [the New York market that currently trades at around
11,000]. That could happen in just a couple of days.

“What’s being put around behind the scenes is that we’re looking at 1930s
stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is
extraordinarily scared. It’s going to be really, really nasty.”

Investors fretted about contagion into Europe, where Fortis, which was part
of the consortium that bought ABN Amro last year, fired its chief executive
after liquidity concerns pushed shares down more than 20pc to a 14-year low.
Holland’s ING and BNP Paribas are looking at buying the bank this weekend.

London investors have warned that the FTSE could suffer falls of as much as
1,000 points - a fifth of its value, if the deal falls through.

Peter Spencer, economic adviser to the Ernst & Young Item Club, said: “This
is the time you have to bail people out and ask questions later.

It is very difficult to see how the US banking system would survive without
that.This has the potential to make 1929 look like a walk in the park.”

Senator Harry Reid of Nevada, the majority leader, said: “We hope sometime
[Sunday] evening we can announce some kind of agreement in principle. We may
not have another day.”

Rebel Republicans who see Paulson’s proposals as socialism by the back door
were warned they will be responsible for causing an “amazing catastrophe” if
they continue to oppose the plans, which would see taxpayers buy up the bad
debts of failing banks. Instead they want an insurance scheme for banks, which
would spread the cost to private enterprise.